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PF Notecard #3: Live Below Your Means

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Advice on a card 2On the index card that lists everything you need to know about personal finance, point #3 is “Live Below Your Means.” But what the heck does that mean?

In my notecard stack, it means more than live “within” your means, which suggests you live up to the limit of what your income will support. Living below your means is spending significantly less than you earn, and doing so in a meaningful, strategized way.

The primary way to accomplish this is to automatically set aside a portion of your income for savings. Most employers that direct deposit can deposit portions of a paycheck to different accounts. If yours will do that, arrange to have, say, 10 percent of your take-home pay deposited to a savings account. Alternatively, you can set up your bank account to do an automatic transfer from checking to savings on a certain day of the month. If you have a side gig, you may be able to put the most or all of that net paycheck into savings and live on the income from your main job.

That’s after you’ve had a specific amount withheld for a 401(k) or 403(b). If your employer doesn’t provide a savings plan, then set up an investment savings fund and have 15% of your pay deposited to that, right off the top. IMHO the preferred device for this is probably an index fund with a low-overhead mutual fund company such as Vanguard or Fidelity. At least part of this amount should go into a Roth IRA, which will protect you from the onerous and tax-heavy Required Minimum Distribution rule after you retire. Keep the rest of it in regular funds, if you think there’s any chance at all that your income after retirement is likely to be close to what you get while working.

So: 15% of your pay should go to an employer retirement plan or, if contributions are not matched, to your own long-term investment savings. THEN at least another 10% (up to 20%) of the remainder goes into savings in a bank.

What’s left is what you live on. That’s living below your means.

And how do you accomplish this frugal lifestyle on the few pennies you have left? Any number of ways…

  • Buy a smaller house than you can actually afford.
  • Buy in a lesser neighborhood than you could in theory afford.
  • Buy less expensive cars than you can afford.
  • Eat in most of the time. Learning to cook is one of the biggest moneysavers out there.
  • Never charge more than you can afford to pay out of pocket in a given billing cycle.
  • Stay out of debt. If you can’t pay for something in cash, don’t buy it.
  • Never pay full price for anything. Buy clothing on sale, at outlet stores, or in thrift stores.
  • Vacation frugally. Consider a camping trip instead of a flight across the globe.
  • Break the “Stuff” habit: don’t buy things you don’t need. Pass on a clothing purchase if you already have something that will do.  And refrain from collecting bric-a-brac and useless items, be it piggy banks, comic books, computer games, or old CDs. Think minimalist.
  • Choose a hobby that doesn’t break the bank. If it requires pricey equipment or supplies, find another way to pass the time.
  • Learn to do things yourself.

None of these is very hard.

What about that 10% you put into the bank? Before long enough will accrue to provide a decent emergency savings stash. If you’re lucky and two or three years pass without a really big unplanned bill, you may have enough to skim off some to contribute to your retirement savings.

I have three sets of savings: short-term emergency savings (enough to cover a routine plumbing or car repair, for example); long-term emergency savings (major repairs, non-routine dental bills), and retirement savings. A bank account will do for the first two; retirement savings, of course, should go into some kind of investment. Back in the day when CDs paid a little interest, I used to have long-term emergency savings in a credit-union CD. Now it’s all in the same savings account. My retirement savings are professionally managed; most of it is with Fidelity.

All You Need to Know about Personal Finance Fits on a Notecard
#1 Get an Education
#2 Get a Job

Income Streams/Savings Streams

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People talk about establishing several income streams to increase net household income, pay off debt, and build a safety net for hard times. I certainly have advocated that more than once, because I’ve done it and it’s worked well for me. A small, unsteady income from freelance editing combined with taking on a few courses at the Great Desert University and then at a community college earned enough to pay off the second mortgage on my house, leaving my house free and clear before I was laid off, and helped establish a $14,500 emergency fund, which, in a pinch, would cover a year’s worth of living expenses.

So…how did I manage to cobble that much together, when I certainly didn’t net $35,900 ($21,400 went to pay off the loan) in those two semesters of part-time teaching?

Well, you’ve heard of snowflaking, whereby we put every little windfall and every extra few pennies toward debt? I think of this as snowmelt into savings streams. For some years before I was laid off, I had several savings streams:

• One was a regular credit-union share savings account, into which I put a base amount of $200 a month. In addition, I also deposited any windfalls in here: the annual American Express card rebate, manufacturers’ rebates, gifts, whatever. In palmier days, come to think of it, I usually  put the AMEX rebate into a Roth IRA, but that’s another story.

• Another was a money market savings account, into which I put everything I netted off sidestream jobs—teaching and freelancing—plus any other windfalls that came my way. This was the primary savings for the loan payoff.

• A third was a money market checking account. Each month as paychecks came in I moved $1,500 here, to cover the $1,500 a month I budgeted for credit-card spending. This represented discretionary spending, as opposed to monthly bills that have to be paid come hell or high water. Usually, I spent significantly less than this. Any money that was left over stayed in money market checking.

• A fourth was another share savings account at the credit union. It held a monthly $325 self-escrow to pay annual property taxes, homeowner’s insurance, and auto insurance.

• And a fifth savings stream was a Vanguard Prime Money Market Fund, into which I put 30% of all freelance income—a set-aside to pay income taxes and my tax preparer.

Three of the five monthly “snowmelts” happened as automatic transfers: on the first of the month, $1,500 was moved to money market checking to cover discretionary expenses; on the last, $200 went to monthly savings and $325 went to tax & insurance savings. Instead of “paying myself first,” I kept that $525 in my primary checking account until the last of the month to ensure that no checks would bounce. They never did. But in Quicken I deducted the amount from the bottom line, so I would always know what was left in the account with those savings streams flowing out.

In other words, what I left in checking from each month’s pay was only enough to cover monthly nondiscretionary expenses. Funds for costs over which I had some real, credible control were paid from the credit card budget, which flowed into an account specifically to pay off the card in full each month.

Because the discretionary budget is based on summer expenses, which are about $300 higher than late fall, winter, and early spring costs, over time quite a bit of leftover money quietly accumulated in regular checking, just as it was quietly accumulating in the discretionary spending account (because I rarely used all my discretionary budget).

It’s surprising how much money accrues—and how painlessly it accrues—when you make savings streams a part of your financial life. When I was finally laid off last December, I was pleased to find something over $28,000 lurking in the credit union. That was after the second mortgage was paid.

Admittedly, a credit union or bank account is not the best place to stash 28 grand. I simply hadn’t registered how much had accrued in the various accounts that I wasn’t deliberately using as savings accounts. When you added the serendipitous savings that resulted from living within my means to the deliberate savings, it came to quite a lot. I moved $14,000 to investments and kept $14,500 as this year’s “cushion,” knowing that with Social Security’s stringent earned-income limit, 2010 would be tight.

Although 2010 is tight, I still haven’t lost the savings-stream habit. In semiretirement, I no longer feel the need to save as much—largely because I no longer live in fear of layoffs. And restructuring The Copyeditor’s Desk from a sole proprietorship to an S-corporation changed its tax structure, so I don’t have to set aside a chunk of dough to cover taxes on freelance enterprises.

• I’m now keeping all budgeted spending money—discretionary as well as nondiscretionary—in my primary checking account. Because I’ve undershot both budgets all winter…uhm, well…ahem…until the great Shopping Spree Episode…about $2,100 extra has accrued in there. So it’s a de facto savings account, although I expect to spend that money over the summer, when teaching income dries up.

• Regular monthly savings still gets its $200/month deposit, plus all other small windfalls. As a matter of fact, this is where the $700 to cover the clothing frenzy will come from. With over 14 grand sitting in checking as a gigantic emergency fund, the regular monthly savings account, which I used to regard as “emergency” savings, is now a diddle-it-away fund.

• Another $325 still goes into the self-escrow account each month. Taxes and insurance being unavoidable, that one’s not an option. Starting this month, I’ll add another $90/month to that, to cover the annual cost of Medigap insurance.

• The corporate account now collects all freelance and blogging income. With an S-corporation, you pay yourself a salary, which can be fairly modest as long as it recompenses you reasonably for the work you do as the corporation’s director (which ain’t much). The money that remains in the corporation can be used to cover your incorporated enterprise’s operating expenses (such as computer equipment, office supplies, server space). Money that you draw out after you’ve been paid your salary is treated as dividend income. To date, I haven’t needed any of that money to live on. So, the corporate account also functions as a de facto savings account.

Even though I’m now unemployed (or, we might say, “underemployed”…in a big way), with a total gross income of about 58% of what I earned at the Great Desert University, money is still flowing through four income streams (teaching, Social Security, a small pension drawdown, and the incorporated freelance enterprise) into three formal savings streams (tax & insurance, regular monthly savings, and the corporate account) plus an informal savings stream in the form of unspent cash in regular checking.

Savings streams ensure that there’ll always be enough to cover those ugly recurring tax and insurance bills, plus something to pay for the occasional indulgence. Consequently, my lifestyle has really not changed much, despite the 42 percent cut in income. Thanks to a few small income streams and savings streams.

Every little bit helps...

Money Happens: Planning ahead through 2011

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Reviewing the first quarter of post-Canning Day finances, I’m amazed to discover that I’ve not been spending as much money as I budgeted, and not anything near the amount that’s been flowing into the checking account. In fact, on average I’ve spent about $1,100 a month less than income!

The reason for this, of course, has been the part-time teaching, which will end in May and bring in nothing for two and a half months, when expenses rise into the stratosphere.

But…but my $805/month nondiscretionary budget, which includes those soon-to-be-stratospheric utility bills, is based on the bloated summer rates. So in theory, as long as I stay within the discretionary spending budget of $800, even in the summertime I shouldn’t be spending much more than $1,600 a month. In June and July, my income will drop to about $1,390 a month (maybe less, if I put my latest scheme in action—see below). That’s about $210 short. But with $3,400 sitting there from the first-quarter budget underruns, in theory it shouldn’t matter. Those two unpaid and two underpaid months would eat up only about $420 of the three thousand bucks residing there from the first quarter.

Here’s how this shakes out:

Yipe! The average monthly net left in my checking account, income minus expenses, has exceeded $1,100 a month!

Part of this happened because Social Security has been dragging its feet on withholding income tax from the benefit it’s paying. I’ve now asked three times and am assured that in April my SS payment will be $1,008, down from $1,257.

So, in April Social Security income drops about $250; in May teaching income drops in half and in May and June drops to zero. In August teaching income starts up again, with one paycheck that month, two a month from September through November, and one again in December. Net Fidelity income is $389 a month, giving me a net income of about $1,389 in June and July. For the entire year 2010, the result looks like this:

Can that possibly be correct? This suggests that teaching 3 and 2 and collecting $385 net a month from the Fidelity 403(b) will leave me with a surplus of over $9,000 at the end of the year!

Amazing, isn’t it…

Well, the state General Accounting Office demanded that I take a drawdown from my Fidelity 403(b), lest my request to collect my RASL be rejected. This worked contrary to my purposes, because that money needed to be left in investments in hopes that during the time I still have the strength to work, it will recover some of the losses incurred during the crash of the Bush economy. So I asked for $500, the least I thought I could get away with. The net on that is $389 a month.

The fact is, now that the first of the three annual RASL payouts has been approved and transferred to my keeping, it’s unlikely the RASL administrator is going to notice what’s going on with my drawdown. So, I’m thinking I should continue to draw down $500, but have only $100 deposited in checking, rolling over the remainder to my big IRA, which is professionally managed and doing quite well. Another advantage of this strategy is that it would drop my gross income into a lower tax bracket and might insure that none of my Social Security would be taxed at all.

To get 100 after-tax dollars in my sweaty little hand, I’d have to ask for a $125 transfer to checking (i.e., $125 – 20% tax = $100). This would leave $375 a month to roll into the IRA: $4500 a year. It would look like a $500-a-month distribution, but in fact the lion’s share would be extracted from the plain-vanilla 403(b)  into my better-managed IRA with no tax consequences.

In terms of my cash flow, what would happen? Collecting $100 instead of $389 a month would remove $2,601 ($289 x the remaining 9 months) from the bottom line above for 2010:

Okay. So, what if I cut Fidelity income to $100 a month for the entire year of 2011? Could I survive? Let’s assume a 3% inflation rate for expenses, since everything but our paychecks is going up fast. In this scenario, I again teach 3 & 2 instead of 3 & 3:

Huh. Almost $5,000 left at the end of the year. These figures translate to after-tax funds I can use to pay toward my share of the mortgage ($9,000 a year) in 2011 and 2012, delaying serious drawdowns from retirement savings another two years!

So, if there’s that much play in the budget, why on earth am I working at all? What would happen if I didn’t teach in 2011 but instead collected the net $389 on a $500 monthly drawdown from Fidelity?

Yes. The Copyeditor’s Desk, Inc., would earn enough to cover the shortfall and more over the course of a year. As we come to the end of the first quarter, the corporation is holding $2,218, and I’m doing precious little freelance work! Net after a 20% tax payout would be $1,774. That’s for a single quarter in which I’ve made no effort to find work.

Teaching one section would net $1,920, more than enough to break even.

I have to ask you, isn’t that the most amazing thing you ever saw? I can’t believe my expenses are that low in this four-bedroom house on a quarter-acre with a big pool and a forest of fruit and ornamental trees.

And yes, it has occurred to me to wonder if I’m being too frugal here. Surely I can afford to get my hair done by a better stylist than the $30 guy—last week he left me with a tuft sticking out at the neckline and a kind of box-like cap on top. Possibly I can afford to buy some clothes somewhere other than Costco. Or, who knows? Maybe I could even afford a cell phone.

I don’t feel like my life is pinched. I still shop at AJs and Whole Foods; I still buy plants at the fanciest nurseries in town. So…is this money happening, or what?

Financial Freedom: Building the bankroll, part 1

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In the quest for financial freedom—the search for a way off the day-job treadmill—it’s important to build the habit of living not just within your means but below your means.

When you live within your means, you spend no more than you earn. In living below your means, however, you spend less than you earn. This allows you to put money aside for future use; to wit, early retirement. The scheme is pretty simple:

• Live below your means;
• Save a specific amount each month;
• Also set aside whatever else you don’t spend;
• Stash your savings in investments and leave it there.

Saving is a strategy you can start at quite a young age, from the moment you begin to earn. My first full-time job paid a grandiose $300 a month. After paying the rent, I had $200 to live on. From that I budgeted $15 to buy myself some clothes or shoes and $20 to put into savings. Following the old adage, I always paid myself first. We didn’t have automatic electronic funds transfers in those days; I had to physically go into the bank to deposit my paycheck, and while I was there I had a share of it deposited to a savings account. If I hadn’t spent the previous month’s clothing budget, I transferred that or the amount remaining from it to savings, too. I still do the same today, only instead of $20 I put aside $200 plus anything else that doesn’t get spent.

It doesn’t sound like much, but over time it adds up. And when you’re young, your greatest financial asset is time. Twenty dollars a month invested at 8 percent starting in, say, 1967, when I began working, today would amount to $89,498.86. If you began investing $200 a month today and worked for twenty years, in 2030 you’d have $117,804. That’s a respectable amount, especially if you’re saving from after-tax income so that this is on top of your 401(k) or 403(b).

Yes. That’s what I’m talking about here: not only investing before-tax income in whatever savings plan your employer offers, but also setting aside something from take-home pay.

For most people, $200 a month is minimal. In fact, while I was still working I was setting aside about $370 a month, plus whatever was left over from my general operating expenses. Over 20 years at 8 percent, $370 a month would add up to $217,937.55—about as much as my 403(b) accrued in 15 years with matching contributions from my employer. In other words, the habit of saving and investing on your own can double your retirement savings…and at least some of it will be in instruments that you can access before age 59½, a crucial factor for those of us who do not intend to stay in the traces until we drop.

Even if your earnings are modest, it’s surprising how many ways you can find to unearth cash for savings and investment.

If you’ve recently succeeded in paying off debt, then you know that you can break loose a certain number of dollars from your income for purposes other than mere survival and indulgence. If that’s your case, instead of diddling away the newly freed-up income that you were having to use to service debt, put it into savings.

If you’re using the “snowball” approach to debt payoff, once you’re out from under the debt, put the snowballs into savings. If you’ve “snowflaked” debt away, keep on putting every little windfall aside, only put it into savings and investments.

Similarly, when you get a raise or move to a better-paying job, don’t change your standard of living. Put the increase into savings.

More proactively, start a side income stream and invest all the after-tax proceeds for the future. My freelance endeavors, for example, have earned around $8,000 to $10,000 a year. Eight grand amounts to about $666 a month; invested at 8 percent over our 20-year period, it would add up to $392,288.

Living below your means entails downsizing before you upsize. Instead of buying the biggest, most grandiose house you can afford, for example, buy a more modest but comfortable house. Or rent instead of buying and save the difference between the rent payment and mortgage payments for comparable digs. Refrain from buying the largest, fanciest vehicle your paycheck will support; get a car you can pay off quickly and use the amount you’d have to put into payments to build your Bumhood stash. Find better ways to entertain yourself than sitting in front of the boob tube, and then ditch the cable TV. Get rid of the land line. Learn to cook, and eat better for less by eating in instead of haunting restaurants.

If you never develop the habit of buying more than you need, you’ll never miss what you don’t have. Obviously you don’t have to live like an anchorite. But too many apparently middle-class Americans fail to distinguish between indulging their wants and providing for their needs. As a result, they’re really not in the financial middle class: they’re actually poor folks who are in way over their heads.

By April of 2009, the average household saving rate was only about 4 percent of disposable income. Let’s say you have $48,000 left after taxes from a $60,000 household  income: that would give you an annual savings rate of $1,920—significantly less than the rather modest $200/month we started with in this discussion. If your 4 percent includes your required contribution to an employer’s deferred saving plan, then you’re not even putting $160 a month ($1,920 ÷ 12) aside from take-home pay.

Meanwhile, economists at the Federal Reserve estimated (also in 2009) that despite the slight increase in U.S. households’ savings rate, most savings were going to pay off debt, which had accrued at a staggering rate during the recent boom, when consumption far exceeded income. To eliminate this household debt, the Fed observes,

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018.

Clearly, if you start out with little or no debt and never accumulate debt, instead of pouring your savings into some already spectacularly wealthy banker’s pockets you can put your money to work for you. Living below your means is, then, the first stage of building your Bumhood bankroll.

The Financial Freedom Series

• An Overview
• Education
• Work
• Debt
• The Health Insurance Hurdle
• Own Your Roof
Building the Bankroll, Part 1
Building the Bankroll, Part 2

If I Had It to Do Over: 10 money moves I’d do differently

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Ever think about what you’d do if you could turn back the clock and be 20 again? Though I wouldn’t especially want to live my life over, there are a number of money moves—and decisions that had more influence on lifelong personal finance than I could have guessed at the time—that I’d either not do at all or that, given a peek forward 40 years, I’d do differently.

For example:

• I would have taken advanced degrees in disciplines whose graduates make decent pay.

Can’t say I regret having prepared for an academic career. It has allowed me to earn an adequate (not generous) living after spending way too much time as a lady of leisure. However, I’d never recommend to a young person who wants a life in academe that she or he pursue a doctorate in the humanities. University faculty in business, engineering, and law earn more than those in other disciplines. A Ph.D. in accounting can start at the assistant-professor level with a six-figure salary, and believe you me, that is one hell of a lot more than you earn teaching history or English.

Mind-numbing major? Puh-leeze! What could be more mind-numbing than postmodern theory? Oh yah: postmodern feminist theory! Give me a bag of beans to count, any day!

Knowing what I know today, I’d still want a career in higher education. I would take an undergraduate degree in a humanities discipline that a) interested me, b) would furnish a young mind, and c) would build skills in logical thinking. But at the same time I would take lower- and upper-division courses in statistics and basic college-level math. Then I would get myself an M.B.A. and a Ph.D. in business management, a subject not too taxing for my sketchy math skills. With those credentials—which certainly demand no more work, expense, or skill than the doctorate in English that resulted in a well respected book published through a prestigious press—I’d be earning about twice what I make now.

• I would have started working in higher education early on, even though it entailed having to teach five sections a semester of freshman comp at a community college.

What I didn’t understand, in my callow youth, about that horrifying prospect is that over time community college faculty find ways to evade the most onerous courses and to wangle course release time, just as university professors do. Nor did I have any idea how much more community college faculty here earn, compared to GDU, UofA, and NAU faculty.

Without the fugues into magazine journalism, today I’d be earning a decent income, and I’d probably occupy a layoff-proof job. Or, more likely, I would have retired by now with plenty of savings to support me in the style to which I was accustomed while I was married to the corporate lawyer.

• If I were 25 again, I would insist that my husband include me in the marital finances.

It was easy to tell my women friends to get a grip on their family finances, establish credit in their own names, and know where the money was. But all the time I was dispensing that excellent advice, I wasn’t following it myself! I had no idea where all our money was going, I did not know what my husband was investing our money in or what debt he was obligating us to, and to tell the truth, I never did know exactly how much he earned. Because he deliberately entered false figures in the checkbook, I couldn’t reconcile the bank statements when I tried, and so I had no clue how much we had in our joint account. Nor did I know about the two other bank accounts he’d opened without my name on them.

• I would open my own savings and checking accounts—preferably at an institution other than the one that held our joint account—and set aside part of my paychecks, my freelance income, or (when I wasn’t working) part of the grocery money.

Being my relentlessly frugal father’s child, I was bothered when the husband refused to save for our son’s college education. But he never tried to exercise any serious control over how much I spent. In those days, I paid for everything with checks and often asked grocery-store cashiers for cash back (cash-back policies were more generous then). I could easily have creamed off $100 a month—weekly cash-backs of $25 would’ve gone unnoticed. If I’d started doing that the month my son was born, I would have stashed $21,600 for him by the time he graduated from high school.

My husband also refused to budget; his express reason was that budgeting is for poor people. Consequently I had no control over our spending and no idea whether I was spending more than we had. If I’d put aside money  for myself, I could at least have budgeted independent of his whims and felt more in control of some of our finances.

• I’d use a credit union instead of banks.

Even before banks decided to make a profitable business of fleecing their customers, credit unions were always preferable to commercial banks. Savings rates are higher, checking is free, and service is infinitely better.

• I would have learned about investing early on.

If I’d had a clue about such things as mutual funds (no joke: before I walked from the marriage, I’d never heard of them), I wouldn’t have taken my husband’s private banker’s weird advice to invest a $40,000 inheritance in (hang onto your hats, folks!) one-week CDs! Yes. Forty grand sat in one-week CDs for over a year, until after I ran away, spent three awful months sleeping on the ground in the outback of Alaska and Canada, and finally made my way back to the city.

Yup. I could’ve invested the $21,600 of grocery money in instruments that earned compounding interest, too. Hmmm. Check out this handy-dandy little calculator. Assuming we went ahead and paid for my son’s education out of his father’s capacious salary and so I just kept on investing a hundred bucks a month for him at, say, 8 percent, today he would stand to inherit another $177,395.38.   Ah, coulda shoulda woulda!

Moving on…

• I would have learned and started to use Quicken the minute it came out.

Quicken is the answer to the innumerate English major’s dreams. Not having to add and subtract (something I can’t do reliably even with a calculator) made it possible to reconcile bank statements easily, without dampening sheets of paper with sweat or with tears. Consequently the program allowed me to take firm control of my financial life, in a way that wouldn’t have been possible when every encounter with money involved a daunting episode of math torture.

• I would have learned how to use Excel.

I still don’t know it well enough to free myself from Intuit, which, despite the glories of its Quicken program, rips off customers by issuing ever-more-bloated annual updates that won’t read data in formats more than three or four years old. Excel does everything I need Quicken to do, it doesn’t go out of date, and it functions across platforms.

• I probably would have spent less on my current home’s landscaping.

I’m pleased with the yard and glad to have it, but something acceptable could have been accomplished at lower cost. Specifically, I wouldn’t install such a large front patio (or possibly any front courtyard!), and I would have planted younger, less expensive trees.

• I would have opened a Roth IRA as soon as they became available and maxed out contributions every year.

Though we can add a substantial amount to our 403(b) above and beyond our mandatory retirement contributions, the university matches only 7 percent of our paychecks. IMHO, that makes these highly restrictive investment instruments less desirable than the after-tax Roth IRA, which accrues interest and dividends tax-free and can be passed to your heirs without encumbrance.

My not building Roth savings from the get-go is a function of late-blooming investment knowledge. Which takes us back to item 6: learn about investing early on.

What would you do differently if you could start from financial scratch again?

On this subject, check out Frugal Scholar’s conversation about the most successful things she and Mr. FS did with their finances.

Pay off debt or build savings?

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Over at I’ve Paid for This Twice Already, Paid Twice invites her readers to think about the relative importance of paying off debt or building savings. Which should be a person’s top priority? It is, as she points out, not a clear-cut decision.

Some people say that there’s “good debt” (such as home and student loans, owed on property or training that eventually returns more than you pay…supposedly) and “bad debt” (everything else; especially credit cards). I personally would argue that there’s only debt, and debt is slavery. Debt forces you to stay in the traces until you pay it off or until you die, whichever comes first. Over at Debt Kid, Jessica describes experiencing the same revelation.

Freedom from debt is freedom to live as you choose. Period. If working brings you personal fulfillment, you can do it—and a debt-free worker is one who has a great deal more disposable income (to say nothing of more options) than one who labors under the lender’s lash. If you want to retire or devote your energy to low-paid but altruistic work, debt freedom will make either of those choices possible.

I’ve used savings—in direct contradiction of advice from money advisers—to pay off debt and never once regretted it. Here’s why:

1) Revolving debt cuts your purchasing power by the amount of the interest gouge. If you pay 18 percent for everything you put on a charge card, then each dollar you spend is really worth only 82 cents.

2) You don’t actually own anything when you’re making payments on it. The bank owns it; you’re just renting it.

3) For most mere mortals, the so-called tax benefits of mortgage interest are negligible.

4) If you own your home outright, the absence of a mortgage payment increases your real take-home pay enormously. I couldn’t live on my net income if I owed on my house or had to pay rent. I paid $100,000 for my first house, for which I put down $20,000. Until I paid off the loan, I owed $9,960/year on the PITI. In the best of times, that $100,000 earned $8,000 a year in mutual funds. Paying off the mortgage freed up $830 a month for living expenses and savings. Taxes and insurance on my present house, purchased with the proceeds of the sale of my first paid-off home, are about $2,200 a year, meaning that today I have to set aside about $183 a month to cover those annual bills. That’s a far cry from an $830/month bite…which at the time I paid off the loan represented half my monthly take-home pay.

5) Where real estate is concerned, in normal market conditions (which one day will return), when a house is paid off and appreciating in value, the money you put into it is growing just as it would grow in a conservative investment, at about 6 to 8 percent a year. Thus the $100,000 I paid for my first house yielded $211,000 a few years later, allowing me to buy my next house in cash. Once a house is paid off, you’ll never lack for cash to keep a comparable paid-off roof over your head.

6) This is not true while you’re paying on a mortgage, because the mortgage interest eats up the gains created by the property’s appreciation in value. Over 30 years at 6 percent, a you’ll pay $115,838 in interest on a $100,000 loan; in other words, you’ll pay $215,828.45 for your $100,000 house. If you’d put that extra $115,838 in mutual funds over the same period, the compounding interest would have been paying you, not the bank. Paying just $200 a month extra against principal would cut your payback time from 30 years to 16 years and 3 months and drop your total interest gouge to $57,386.

7) Clearing off  debt opens the way for larger and faster savings. If you could afford to make a payment on a car, a house, or a credit card, then once you’ve paid off the debt you can afford to put the amount of the payments directly into savings and investments.

So, in a way, debt pay-down is a form of saving.

On the other hand, in recessionary times when one’s income is at risk, you need a substantial emergency fund. If you find yourself starting out during a recession, your first priority obviously should be to stash enough to live on for at least six months, preferably longer. IMHO the ideal emergency fund contains one year’s worth of your present net income.  Once you have it, though, you’re justified in devoting every extra penny to paring down debt of all kinds.

In good times or bad, saving should be part of your agenda. But since freedom from debt makes your money go further and allows you to save substantially more, getting out from under debt should be your top priority.